Netflix’s CEO: Traitor or hero?

By Todd Ordal

Published: 2011.10.05 12:40 PM

A recent edition of the Wall Street Journal had three columns on Netflix CEO Reed Hastings. He's mostly vilified for his pricing decision and splitting his DVD business with his streaming business. I don't want to explore his pricing strategy, nor do I want to write yet another populist message asking how he could be so harsh toward his customers by dramatically raising his product's price.

This is far more than just a pricing decision; it was a choice about the viability of his company. Here's my premise: Reed Hastings showed tremendous courage to address a looming disaster - courage that many leaders couldn't have shown. I don't know what Netflix will look like in the future, and I don't know if his strategy will work. (If you do, don't be a pansy! Buy or short the stock!)

What I do know is that he looked into the future and said, "This dog won't hunt!" The latest annual report filed with the SEC states, "Our core strategy is to grow our streaming subscription business within the United States and globally." Right or wrong, he took action consistent with his strategy.

How courageous to take a hard left turn when you're still profitable and growing! The business landscape is littered with companies and industries that died for lack of courage. One of my favorite examples is the record industry. Steve Knopper, a Rolling Stone editor, wrote a great book about this titled "Appetite for Self-Destruction." It's fascinating and frightening if you're a CEO, and even better if you're a CEO and love music!

What if the leaders of Blockbuster, Polaroid, Kodak, Schwinn, and the failing record labels and newspapers had Reed Hastings' courage? They might have failed miserably, but not because they put their heads in the sand!

What are the prerequisites for a company to shed its skin and become a different animal?

1. A looming and discoverable disaster2. A future-focused leader with a process for identifying probable game changers and crafting a new vision and strategy3. A leader with tremendous self-confidence who understands risk4. A leader who's willing to forgo today's profits and rewards for the possibility of longer-term prosperity5. An extremely supportive board or ownership if a hired gun runs the company (Was Lee Apotheker of Hewlett-Packard a poor leader, or was he a courageous leader without the board's support? We may never know!)6. The resources to execute the new vision and strategy

Some extremely talented CEOs who run very successful companies do NOT have these characteristics. As long as they don't run into a Napster or an iTunes, they may prosper for their entire term!

Another option, of course, is to run the declining business as a cash cow - stop reinvesting, pull out free-cash flow and invest it elsewhere. (This is how Warren Buffet built his empire - by drawing available cash from Berkshire Hathaway, a textiles company in a slow death spiral, and reinvesting in other companies with growth potential.) However, like the federal government, most operators can't get themselves to willingly wind down expenses.

Time will tell whether Reed Hastings is a turncoat or a hero, but I give him a lot of credit for having the guts to change.{pagebreak:Page 1}

There are a number of wild cards that could drastically alter these predictions, but 2017 is going to be full of volatility (look at the wild swings in treasuries and stocks already) that will no doubt impact Colorado real estate.

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